Free Money Finance

Fourteen Tax Management Techniques

2009-12-07T16:45:00-05:00

The following is a guest post from Marotta Wealth Management.

No one approaches financial planning with the goal of paying more taxes. Tax management, like all financial planning, is based on the premise that small changes made over time can achieve big goals. Good investment returns are important. But over the next few years, comprehensive tax management may reap even greater gains.

Don't file your taxes in April and then forget about them for the next 10 months. By investing a little time throughout the year, you can create compounded value. The 14 techniques described here may help you lighten your tax burden.

1. Check line 45 on your 2008 IRS form 1040 to see if you paid any alternative minimum tax (AMT) last year. People subject to AMT pay an average of $6,000 more than they would otherwise. AMT turns tax planning upside down. Because conventional wisdom may not apply, be sure to review your financial affairs with a professional.

2. This year offered a spectacular opportunity for realizing capital losses. Realized losses can offset realized gains. They can also be deducted against ordinary income up to $3,000 a year. Any excess above $3,000 is carried forward and can be deducted in future years.

3. You can realize capital losses and still stay fully invested. Sell the security, and then wait 31 days before buying it back. Alternately, double up. Purchase the same number of shares you currently hold. Wait 31 days. Then sell the original shares for a tax loss. Waiting a month between the sale and the buyback avoids a so-called wash sale, which would prevent you from taking the tax loss.

4. Individual stocks offer more opportunities to realize capital losses or gift capital gains. This is useful primarily in larger portfolios. A portfolio of individual stocks collectively may mimic the return of an exchange-traded fund and still provide additional tax savings. For example, although the total return might be 10% for the year, one of the individual stocks has doubled and two others lost 50% of their value. By holding individual stocks instead of the fund, you are able to sell the two stocks that have a 50% negative return and take the loss on your taxes. Holding the stock that has doubled in value postpones paying capital gains.

5. Using appreciated stock for charitable giving can avoid paying capital gains entirely. This allows you to contribute up to 15% more than you could with a cash gift.

6. This year also extended the opportunity to make qualified charitable distributions. If you are 70 1/2 or older, gifts you make directly to charity from your IRA are not counted as income. In this way you can reduce your tax deduction phaseouts for additional savings.

7. Perhaps you are considering funding a 529 college savings plans for your children or grandchildren. Contributions in some states (including Virginia) qualify for a state tax deduction if executed before the end of the year. Up to $4,000 per account can be taken, with the remaining amount carried forward to future years. Account owners over age 70 are allowed to deduct any amount they contribute to a 529 plan in 2009.

8. Keep in mind that if you make your fourth-quarter state estimated tax payment prior to year-end, you can use it as an itemized deduction next year.

9. You may also give $13,000 per person in 2009 to an unlimited number of individuals without gift tax implications. Families interested in maximizing intergenerational wealth transfers should explore with a professional how trusts can minimize their tax burden and maximize estate planning.

10. Putting investments in the correct investment accounts can also generate significant savings. Fixed-income investments belong in traditional IRA accounts. Interest is taxed at ordinary income tax rates, but the entire value of an IRA account is taxed at ordinary income tax rates anyway upon withdrawal. Appreciating assets should be in taxable investment accounts where the growth will be at a 15% capital gains rate, which is likely much lower than your ordinary income tax rate. Additionally, any foreign tax paid on foreign stock investments is tax deductible in a taxable account. Finally, those investments with the greatest potential for growth belong in Roth accounts where no tax will ever be paid. This tax management alone may boost your after-tax returns by as much as 1% annually.

11. Although small business owners shoulder much of the tax burden, they also enjoy more tax-maneuvering flexibility than other taxpayers. Reducing your taxes may be as simple as deferring income until next year or accelerating Section 179 expenses in the current year.

12. If you own a business, consider stashing cash in a retirement fund to reduce your tax liability. With a solo 401(k), you can contribute to the plan both as the employer and as the employee. As the employer, you can contribute either 20% of self-employment income or 25% of compensation income, depending on your company's structure. Plus, as the employee, you can contribute another $16,000 ($22,000 if age 50 or older). Finally, for the employee portion, tax planning can help you choose between a Roth 401(k) or a traditional pretax contribution.

13. Converting traditional IRA assets to Roth IRA accounts offers a chance for additional tax savings. Couples with an adjusted gross income below $100,000 can always consider a Roth conversion. Next year everyone, regardless of their tax bracket, can convert or contribute to a Roth IRA. And because 2010 is also the last year of the Bush tax cuts, you can use the conversion as a way to avoid the coming tax tsunami in 2011. Make plans now to prepare for next year's conversions.

14. Finally, a complex technique called "Roth segregation accounts" could earn your investments even more savings over the next two years. By segregating your Roth conversions in 2010, you can undo (or "recharacterize") those that underperform and keep the winners. This strategy offers you 20 months to determine which accounts to keep. It's as profitable as betting on the horse race after you know the winner.

Although just a small part of a larger comprehensive financial plan, savvy tax management requires professional assistance. Seek the guidance of a personal fee-only financial planner and certified public accountant (CPA), fiduciaries with a legal obligation to act in your best interests. The laws and ensuing complexities are changing annually, and as a result so is the optimum path.

Making the Most of Gift Cards

2009-12-07T11:45:00-05:00

MSN Money shares the 11 golden rules of gift card giving as follows:

1. Reduce the cost of gifting. Consumers who previously might have spent $100 on a gift card for a single recipient this year may consider buying a pair of $50 gift cards to take care of two people on their holiday shopping lists.

2. Let gift card dollars go further. Choosing prepaid cards from discounters and big-box stores lets gift recipients buy more merchandise. Henderson says that such stores let recipients select a broader range of merchandise, including discounted name-brand products.

3. Give people cards that pull 'double duty'. Ideally, gift cards can pull "double duty," offering the chance to be both functional and stylish. Some gift cards are even collectible.

4. Don't limit where gift cards can be spent. While the large selection of items at discount retailers allows for greater choice, so-called open-loop gift cards provide even greater options.

5. Beware of fees and expiration dates. Although open-loop cards provide greater freedom, it may come at a cost. To avoid having gift card dollars eaten away by fees and expiration dates, consider your options.

6. Go online. To save yourself time while increasing your gift card options, try the Internet.

7. Give the gift of health. You can't get any more practical than helping friends and loved ones stay healthy. The appearance of health care gift cards "really highlights that trend toward using gift cards for the purchase of necessities," says attorney Douglass of Alston & Bird.

8. Purchase gift card combo packs. Cross off several names on your holiday list at once with gift card combo packs.

9. Pitch in for group gifting. Retailers are helping prepaid card shoppers pool their resources. Best Buy's reloadable Pitch In card, for example, allows the recipient to create an online account. Friends and family members can contribute to a single account, with gift amounts starting at $5.

10. Get something for yourself. Just because you're giving gifts to others doesn't mean you can't also treat yourself. Some stores may provide a free item with the purchase of a gift card -- or a free gift card with your purchase -- so be on the lookout for such opportunities.

11. Be honest. No one of your list should be upset -- or surprised -- if you need to reduce your gift budget this year.

Here's my annual take/thoughts on gift cards:

1. Personally, I like to use them when I have no idea what the person I'm giving them to would like. Examples: the mailman and the newspaper boy.

2. When we give we try to make sure the store we buy from isn't too limiting (that the recipient has lots of choices of what to buy) if we don't know what the person likes. For instance, Best Buy is too limiting IMO for most people. Home Depot is too. Meijer (think super Walmart) gives lots of options -- everything a mass merchant offers plus food if they want to spend it in that way -- so it's our gift card of choice for "strangers". Everyone can find something they need/want at Meijer.

3. Gift cards are also good when you know what someone might want/like but they're far away and you need to mail them something. We quite often get gift cards for Walmart, Target, and Menards and mail them to various family members. Think about it this way as a recipient -- would you rather get a $20 gift that costs $5 to mail or a $25 gift card? I thought so.

4. Then again, why not simply give cash? For some reason, cash seems so impersonal while a gift card seems nicer. That seems strange, doesn't it?

5. Personally, I HATE receiving gift cards from places I don't regularly shop (especially if that place has limited options.) One store in particular comes to mind. I'm fine with receiving more flexible gift cards -- like ones from Meijer, Walmart, or Amazon.

6. Maybe we will simply give cash this year (to those we don't need to mail gifts to) -- but in a unique way. I still have about $1,000 left in gold, dollar coins, maybe I should give some of these away this holiday season.

7. I try to look for deals when buying gift cards. Some past offers:

Receive an extra $5 when you buy a gift card over $25

Get a free gift when you buy a gift card (you can then give away the gift to another person)

Get a gift card yourself when you buy one

Get a discount on your overall purchase when you buy a gift card

What's your take on gift cards? Like them or hate them?

Best of Money Carnival Live

2009-12-07T09:26:25-05:00

Just my weekly note to let you know that this week's Best of Money Carnival is up. Congrats to all participants and especially the winning post, What is the Current Unemployment Rate?

If you're a blogger and are interested in hosting the carnival, please drop me a note.

What a Rip Off

2009-12-07T05:29:00-05:00

Here's a story that transpired a few weekends ago. I still find it unbelievable.

A friend of ours called my wife one Saturday and said she had locked her keys in her car. The friend was at work (still had several hours to go) and wanted to know if my wife would run over to her house to see if there was an extra key there (we have a key to her place and it's only a few blocks from our house.)

My wife said she would, she did, and she found the extra key. She brought it back to our house and called her friend. My wife said she could drop it off (about a 15-minute drive) in the afternoon if that was good.

The friend said not to worry about it since in the meantime she'd called her dealership (very close to her place of work). They had looked up her key code number and were going to simply cut her a new key. The guy she talked to said it would be free since she was a customer and was so close. The friend even told him she'd give him a free haircut for his trouble.

Later that day (we found this part out that night), the guy shows up, delivers the key, and checks to make sure it works. It does. Then he gives our friend a bill for $70!!!! What happened to FREE?????

Our friend PAYS THE BILL (ugh, I'm dying) because "what else could I do?" When my wife asked about the promise of a free key, the friend really didn't have an explanation for why she didn't ask about it and/or put up a fight.

Here's what I would have done:

Asked about the free key offer. If someone says something is free and then wants to charge me $70, that's their problem, not mine. And they need to explain it.

If the guy didn't have a good reason for the price (and really, even if he did have a good reason, he still told me it was free) and couldn't/wouldn't give it to me for free, I'd call the dealership and ask to speak to his boss or customer service. I'd tell them how I was promised a free key and now they were trying to charge me $70.

If I didn't get the free key (and an apology) after this effort, I'd tell them to forget it -- that I didn't want the key. I'd also tell them that I was no longer a customer of theirs and was going to spread the word about how they had dealt with me.

I would then call my friend (my wife in this case) and ask her to bring me the extra key.

I still can't believe that this happened -- that the dealership did this and that our friend paid it.

FYI, the dealership was a Buick dealership. You think they would be looking at serving every potential customer in the best possible way these days.

How's Your Giving This Year?

2009-12-06T06:05:00-05:00

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

We've talked a lot about what the Bible has to say about giving (tithing, giving generously, being a cheerful giver, etc.). Today I'd like to look at the issue a bit differently -- the amount we're all giving this year and if it's been impacted in any way by the poor economy.

The NY Times says philanthropy has not dipped as much as people’s net worths. A summary of the situation:

The philanthropic economy never dips as far as the economy and returns at the leading edge of any recovery. “It can be for guilt; it can be for pleasure; but at the end of the day, giving is something that makes you feel better,” said Mr. Bronfman, who has been involved with philanthropy for 63 years.

To test this hypothesis, I decided to check in with three philanthropists I had spoken to in 2006. At the time, they were all overseeing personal foundations in a strong economy. Today, the one common thread is that they are seeking innovative ways to continue their philanthropy with diminished resources.

Now while this piece is talking about big-name givers and large foundations, I thought I would spin it a bit and personalize the issue by asking:

How's your giving this year versus last year?

Is the bad economy forcing you to give less than you have done in the past? Or are you keeping your giving at the same level -- or maybe even increasing it?

Ours is about the same as in prior years. We budget for it each year, have a good chunk set aside for giving, and don't vary it much unless we get an unexpected windfall of some sort.

How about you? How's your giving this year?

Four Options if You Can’t Pay Your Taxes

2009-12-05T06:08:00-05:00

The following is a guest post from M Davis at Back Taxes Help.

With the troubled economy it is becoming very common for individuals and business to not be able to pay their taxes. It is an understandable situation when a taxpayer must use funds to pay for necessities after losing some sort of income or incurring large unexpected expense prior to making their tax payments. If this has happened to you it is important to understand your options. If you realize your problem right away and take actions to resolve it you will likely receive a favorable outcome.

When you cannot pay your taxes owed it really isn’t that big of a deal to the IRS. The IRS knows situations do arise when a taxpayer can’t pay their taxes and they have created various methods for a taxpayer to pay back the taxes owed or even settle the taxes for less if they meet specific requirements. Below are the 4 most common methods that can be used by taxpayers to resolve taxes when they cannot pay in full.

1) Installment Agreement – An installment agreement is the most common method used for taxpayers to pay back taxes when they cannot pay in full. With an installment agreement the taxpayer is allowed to pay back taxes owed over time in monthly increments that are manageable to the taxpayer. With an installment agreement it is typically required that the taxes owed are paid off in a period no longer than 60 months. It is typically better to pay off the installment agreement quicker because the IRS still charges interest on the outstanding balance. The good thing to know about IRS interest is typically lower than most credit card interest rates and bank interest rates. Once your installment agreement has been accepted you will be considered in good standing with the IRS as long as you do not default on your monthly payments.

2) Partial Payment Installment Agreement – With a partial payment installment agreement the taxpayer is allowed to make smaller incremental payments towards the tax debt owed than what is required with the normal form of an installment agreement. This type of installment agreement is available only to those taxpayers that can’t meet the monthly required amounts of a normal installment agreement. In order to qualify for this you must prove to the IRS that even if you were to sell your assets you would still not have enough to pay back the IRS and you have no other repayment options available. The IRS will require an updated financial statement from you about every two years to determine if they can collect more money on a monthly basis. Many times a taxpayer will end up paying less than the total amount of taxes owed because the statute of limitations on the tax debt expires before the total amount is collected. The good thing to know about this type of payment plan is that you will be considered in good standing with the IRS as long as you can maintain the required monthly payments.

3) Prove IRS Hardship – When you prove IRS hardship you will be considered uncollectible to the IRS. When you are considered uncollectible they will not enforce collections of the taxes owed for the time being. Getting declared uncollectible happens when you can prove to the IRS that you cannot pay your taxes now and cannot pay them in the near future. A typical case for this would be if someone is disabled and because of this they are unable to work to gain funds to pay their taxes. If this person is able to prove to the IRS their disability then they may be declared uncollectible by the IRS. When a taxpayer is declared uncollectible the IRS will check back to reassess the financial situation of the taxpayer every year to couple of years. If the IRS determines that the financial condition of the taxpayer has improved enough then they will begin to enforce collections again, as long as the statute of limitations has not expired. Being declared uncollectible can be a financial life saver for those taxpayers in need because it will allow them time to get back on track with their financial situation before the IRS requires them to pay what is owed.

4) Offer in compromise – An offer in compromise is a tax settlement program offered by the IRS to allow taxpayers to settle their taxes for less than the total amount owed. This form of settlement is only available to those taxpayers that are financially burdened. The IRS really only accepts this form of settlement if they believe there is doubt to the tax liability or doubt to collectability. The IRS says they will not accept an offer in compromise unless the amount offered is equal to or greater than the amount the IRS expects they would ever be able to collect from the taxpayer, even if they sold off their assets. This type of tax filing is one of the most complex tax filings and is very difficult to obtain. Many people who may qualify for this end up in a partial payment installment agreement or are declared uncollectible because of how tedious the filing is. If you have your offer in compromise accepted by the IRS and you make the required settlement payment then you will be considered in good standing with the IRS.

No matter what your financial situation is there will always be a method for you to get back into good standing or remain in good standing with the IRS. When choosing the best method it is important to take a look at your current financial situation and your anticipated future financial situation. Just remember that the IRS has it in their best interest to make many options available to taxpayers to pay back their taxes because they end up collecting more in the long run. Don’t be scared of the IRS and work with them on a resolution with them because with the proper documents and filings you can find a manageable alternative to paying in full.

What to Tell Your Kids about Their "Rich" Friends

2009-12-04T12:15:00-05:00

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire regarding your kids' "rich" friends:

What happens when your children attend school and/or interact otherwise with kids who display an abundance of expensive consumer products? Your children are likely to ask you why you do not supply them with the same collection of products. Tell them esentially what the parents of [high net worth individuals] told their children:

Never judge the true quality, the caliber of a person, by what can be purchased.

Often people who dress and drive as if they are rich are not.

Try Shakespeare if all else fails: "All that glitters is not gold."

Is it just me or does it seem like every fourth-grader today has an iPhone, mobile video game player of some sort, and a wide array of other toys, games, and "collections"? Just walking around church I can count on one hand the number of kids that doesn't have a cell phone -- and many of them are nicer than my company-provided Blackberry!

We tell our kids that they can have any item we approve of as long as they buy it themselves. Or, if they want, we will pay part of it as part of a birthday or Christmas gift. My daughter used this deal to buy her new camera. We paid for most of it as her "big" birthday present and she kicked in the rest. My son now has enough money to purchase an iTouch (from his soccer refereeing) -- my wife and I are simply trying to decide if we think he'll be responsible with it or not.

How about you? What do you tell your kids when they say their frineds have something (and they'd like you to buy them one)?

How to Get Consumer Reports Online Access for Free

2009-12-04T05:29:00-05:00

Here's a simple money saving tip that I hit on recently. Some of you probably figured this out a long time ago, but for me it was a very nice discovery.

I've been a subscriber to Consumer Reports magazine for years, and even subscribed to their website for some time. But it irked me that the cost for their website subscription was so high -- $19 a year if you're a subscriber to CR magazine ($26 per year if you're not a magazine subscriber.) That's a ton of money for a website subscription! So I let my subscription slide since I really didn't need access to their site information that often.

Then I was on my library's website looking for books when I saw an "ad" that noted I could get Consumer Reports information for FREE since I was a library member. I clicked on the ad, put in my library card number, and presto, I was on the CR website with access to EVERYTHING -- free of charge!

Not only that, but my library has online access to many popular magazines including Money, Sports Illustrated, Time, Newsweek and many more. Sweet! I'll check them all out in the future, but the discovery that Consumer Reports online access was free was the most wonderful surprise for me!

Star Money Articles and Carnivals for the Week of Nov 30

2009-12-04T05:19:00-05:00

For weekday updates of what I find to be some of the most interesting personal finance articles on the web, follow me on Twitter. For now, here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week and my posts that were included:

EDITOR'S CHOICE! Carnival of Money Stories - Five Steps to Six Figures in Seven Years

Fiscal Fizzle tells how to write a great financial mission statement.

Couple Money gives the scoop on grocery lists and price books.

Budget Pulse says to start building your own business.

Gree Panda Treehouse says to watch your credit cards.

The Dividend Guy is an active procrastinator.

Financial Highway offers thoughts on saving on car insurance.

Festival of Frugality - How to Regift

Carnival of Personal Finance - Are You Tipping This Holiday Season?

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.

One Thing that Sets Wealthy People Apart

2009-12-03T16:45:00-05:00

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on one thing that sets wealthy people apart from the pack:

One of the things that set wealthy people apart from others is that they have a wide variety of interests and activities. In fact, there is a substantial correlation between the number of interests and activities that people are involved in and their level of financial wealth.

The book goes on to note that the truly wealthy often value their time as much (or more than) their money, and it often keeps them from spending on items like a vacation home, boat, etc. They think that if they had these, they would need to spend a ton of time with them in order to make it a worthwhile investment. And since they have other interests and/or don't want to spend the time in a second home or on a boat, they don't buy them.

I'm guessing that the "interests and activities" are also reasonably affordable ones. From the tone of the book as well as this section, I'm assuming that these sort of outside interests are more like "playing softball on a community team" than they are "collecting rare Russian artwork."

Part of the involvement issue is that you're so busy that you don't shop (and buy stuff you don't need.) Our usual shopping day is Saturday, where we often go out as a family and get stuff we "need." But during soccer season, my son and I are busy every single Saturday. So either my wife goes or we don't go at all. Guess what? We spend less during those two months. Add in church and volunteer activities, gardening, basketball, swimming and so on, and you can see where doing something else is not only fun and rewarding (and not very expensive) but also simply eliminates the time we have available to shop -- thus saving us money and "accidentally" growing our net worth.

Is This a Viable Way to Save Money When Buying from an Infomercial?

2009-12-03T11:45:00-05:00

In a piece about the secrets of telemarketing from an industry insider, they say the following about buying from an infomercial:

We used simple circle talking techniques to trick people into buying our product. In the infomercial it was $120. We had a list of people that called the number from the infomercial but didn't buy the product. We called them back and offered the same product for $45. Then if they refused we'd go down to $35 and eventually $25 as a last resort effort. They were willing to sell this product for $25, and people were buying it for over 4 times that much! (Employees got the product for $5)

So this got me to thinking -- what if you really wanted a product from an infomercial but wanted to save on it? Why wouldn't you simply call the number, let them do their sales pitch, and then say you don't want the item since it's too expensive? Then you hang up and let them call you with a lower price. The longer you say "no", the more you save.

Of course not every infomercial outfit works this way, so you could be risking losing out on something you really want, but couldn't you always go to their website later and get the item at full price if no one calls?

Seems like a decent method to save some money to me. What do you think? Will it work?

Is There a Difference Between Holiday Help for Presents Versus Holiday Help for Food?

2009-12-03T05:29:00-05:00

This piece from my local TV station discusses how people can get "holiday financial help." As you watch the piece they clearly note that they're talking about two different types of assistance: help for buying presents and help for buying food.

In past years, we've participated in various programs that provided toys for children from less fortunate families. But I'm re-thinking that plan this year. After all, with so many people out of work and hurting for FOOD, is it right to donate so some people can have PRESENTS? Seems to me like food is a "must have" item while presents are "like to have" items.

Anyone have thoughts on this? Is there a difference between one type of donation and the other? Should people give to them both equally? What's your take on the issue?

The Greatest Detriment to Building Wealth

2009-12-02T16:45:00-05:00

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on why your home has so much of an impact on your wealth:

What we don't realize is that the true cost of living in certain homes and neighborhoods is unseen but truly devastating. I believe the greatest detriment to building wealth is our home/neighborhood environment. If you live in a pricey home and neighborhood, you will act and buy like your neighbors. In other words, human beings have an innate tendency to act and be like those around them -- to fit in -- and even compete. The type of home we live in and where we choose to live often takes the greatest toll on our financial wealth, and from it, all other perils flow.

Ok, there's more to come on this topic, but let's stop here for a moment. He says that buying a big home that you really can't afford (that's what he's talking about mostly -- reaching for something well beyond your means that sucks the life out of your finances) is "the greatest detriment to building wealth." Wow. Greater than over-spending in other areas? We'll see in a minute, but he'll say that your home influences what else you spend money on, so if you're over-spending in other areas, much of it is due to where you live. That's why he says it "often takes the greatest toll on our financial wealth" as well as from it "all other perils flow." Food for thought, huh?

Here's some more detail:

The more expensive, the more affluent neighborhoods are a vortex of sociological forces. The more affluent the neighborhood, the more its residents spend on almost every conceivable product and service. From cars to haircuts, and from wine to watches, those living in "prestige estates" spend more. We take consumption cues from our neighbors. If many of our neighbors have a much higher level of income and wealth than we do, we will have set ourselves up to lose the war before we have even begun to battle.

Think about all the things we see in our neighborhoods that influence our purchases: new/nice cars, lawn service, remodeling/house upgrades, bikes/toys for kids, swimming pools, yard equipment, and on and on and on. Let's face it, the Joneses that most people are trying to keep up with are the ones next door! And if your neighbor has a huge expensive house with all the latest "stuff", you're very likely to match (or even try to surpass) what he has. And if you stretched in the first place to buy the home, then you're in trouble trying to buy all the other stuff too (think this sort of sounds familiar?)

The author goes on to tell what the truly wealthy do when it comes to home buying:

Contrary to popular belief, however, most of the self-made millionaires I have studied have one thing in common: They were able to build wealth precisely because they never lived in a home or neighborhood environment where their domestic overhead made it difficult for them to build wealth. In essence, they ran their households like a productive business. It is not only about how much you make. More important, it is how much you keep. And the "keep" component begins and ends at your home address.

A few thoughts:

1. Notice how he didn't say something like "most of the self-made millionaires I have studied have one thing in common: they made a ton of money." Nope. Instead, the path to wealth involves buying a home (and living in a neighborhood) that you can easily afford.

2. Both making money and controlling spending are important to wealth generation, but notice which is more important (and much more controllable by the way)?

3. This has been my personal experience as well. Looking back, one of the key reasons we've been able to grow our net worth is because we bought a home we could easily afford and thus our associated expenses have been at the level that we can handle them financially. It's still a very nice neighborhood, but is well below what the bank would have loaned us based on our income. Yet another reason to decide for yourself what you can afford in a home -- don't let a bank or real estate agent tell you what you can/should spend. (That said, I think banks are a lot more careful these days than they were when we bought our home 10 years ago.)

More on Staying Fully Invested

2009-12-02T11:45:00-05:00

We recently talked about the importance of staying fully invested in the stock market (assuming you have a long term investment horizon) so you don't miss the ride up once the market recovers from a drop. Kiplinger recently highlighted a similar issue -- getting in the market and staying in despite good past gains -- as one of their seven learnings from the recent bull market. Their thoughts:

Once you decide to get in, don’t wait for a correction -- there’s no telling when it will come. With the market up significantly, you may be feeling more confident about stocks, but you’d like to see them come down a bit before you commit some money. History, however, shows that, on average, a correction -- defined as a drop of 10% -- comes 285 days after the start of a bull market, according to the Leuthold Group, a Minneapolis investment-research and money-management firm. In the case of the great bull market of the 1990s, which began in October 1990, the market rose 249% over 1,724 days before experiencing a correction.

I have a 20-year time horizon, so for now I'm in no matter what's happening. I'll stick it out through the good, the bad, and the ugly.

Sometime in January (once all my funds have declared their dividends for December and sent me the reports), I'll give you all some details on how my net worth and/or investments has performed since the big drop in the market late last year and early this year. It should be an interesting post and spark additional discussion on this topic.

Another Wealthy Athlete is Broke (and Nick Cage Update)

2009-12-02T05:29:00-05:00

Here are a couple related situations -- people making a ton of money, spending like crazy, and going broke. The first one is former Boston Celtics star Antoine Walker. The details:

In 12 years, Antoine Walker made more than $110 million playing professional basketball moderately well. Take away taxes, throw in some Adidas endorsement money and a "NBA Live 99" cover, and he's left with, what, $60-to-65 million?

The once multi-millionaire athlete has been pursued by multiple financial institutions for unpaid debts. In fact, according to Shira Springer of The Boston Globe, "Employee No. 8" owes more than $4 million to his creditors and is facing felony check fraud charges in Las Vegas.

Just how did he get into debt with this sort of income? He spent it all -- plus some:

"[Walker] liked to move in an outsized entourage; his mother estimates that, during his playing days, he was supporting 70 friends and family members in one way or another. And speaking of his mother, he built her a mansion in the Chicago suburbs, complete with an indoor pool, 10 bathrooms, and a full-size basketball court. [...]

Living at the Bishops Forest condominium complex in Waltham during the Celtics season, Walker turned the pavement surrounding his home into a virtual luxury car lot — two Bentleys, two Mercedes, a Range Rover, a Cadillac Escalade, a bright red Hummer. Often, the vehicles were tricked out with custom paint jobs, rims, and sound systems at considerable added expense. He also collected top-line watches — Rolexes and diamond-encrusted Cartiers."

But Walker's lavish lifestyle wasn't all "me-me-me." He was also a generous friend and teammate who had custom suits made for coaches, routinely picked up giant team dinner tabs and, when there were funds to spare, gave to underprivileged youngsters. He was basically spending money like it was going out of style.

I think that last sentence says it all -- he simply spent way too much. Antoine Walker is another example that even if you make a boatload of money, you can spend it all (and more!). That's why you need to keep control of your spending no matter what your income. Because if you can't do that, no amount of money you earn will get you ahead financially.

And here's an update on our discussion of actor Nicolas Cage. According to Yahoo, he's had a decades-long spending spree. The details:

An article in The Daily Beast says that Nicolas Cage's recent financial problems are, at least in part, due to outrageous, eccentric spending that puts even his most flamboyant fellow celebrities to shame.

If you can dream it, Nic Cage bought it: yachts, a jet, a castle, over 50 cars, over a million dollars' worth of comic books, multiple (supposedly haunted) mansions in New Orleans, two Bahamanian islands, shrunken heads that may or may not have been human, and, famously, a $500k Lamborghini once owned by the Shah of Iran. Most amusingly, Cage spent $276,000 on a dinosaur skull in a "heated auction with Leonardo DiCaprio." And though the article has details about Cage's many pets -- claiming that he kept antidote serum on his wall for the poison of his two King Cobras -- it neglects to mention at least one: Cage's pet octopus.

Ok, this guy makes somewhere between $10 million and $20 million per movie. But somehow, he's managed to spend it all (along with mis-managing some of it -- or so he claims in a lawsuit against a former business manager.) The combination of too much spending and poor money management has now left him in financial trouble -- and yet another example of the fact that if you spend more than you earn, you're going backwards financially.

Money To-Do Calendar: December

2009-12-01T16:45:00-05:00

The great personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest ends with a list of what financial steps we should take each month. They list the December steps as follows:

Set up self-employed retirement plans.

Sell losing investments in taxable brokerage accounts.

Consider a Roth IRA conversion.

There's still time to make charitable donations.

My take on these:

1. I already have a SEP IRA set up from a writing business I had several years ago, and I make maximum contributions to it each year.

2. Ha! Unfortunately, I have enough investment losses carried over from 2008 to last me for quite some time!

3. I don't qualify for a Roth, but I will in 2010 (the year of the conversion "holiday.) I'll need to run the numbers and see if such a move is a good deal or not for us.

4. We budget for our charitable donations, so there's not much left to be done in December. That said, if I do receive a bonus (I'd get it in December), I will make sure I tithe on it as well as give away a portion too.

5. The one thing I also do in December is allow my checking account to build up a bit (I don't transfer as much money to investments as usual). That's so I can make contributions to an IRA, Education Savings Accounts, and 529 accounts early in January. I max out the first two and put at least enough in the 529s to get the full tax deduction on my state taxes.

How about you? What are your year-end tax moves?

Playing Good Defense is the Key to Getting Rich

2009-12-01T11:45:00-05:00

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire:

Most people will never earn $10 million in their lifetime, let alone in any single year. In fact, most households are unlikely to ever earn even $200,000 or more annually. Currently only about 3 percent of American households are in that category. So what if you will never hit the top 3 percent mark? What if you are unlikely to become rich by playing extraordinary offense (i.e., generating an extraordinarily high realized income), as the glittering rich do? The only way you will become rich is to play extraordinary defense like those millionaires at the other end of the continuum: by living well below your means, by planning, saving, and investing.

We need to stop acting rich, and you need to adopt the values and lifestyles of self-made millionaires. Why? To be happy, to achieve the most satisfaction you can get from life. But you say that having that special car will make you happy, that living in a certain home in a specific neighborhood will make you happy. I say: Not so fast. It turns out that what we say and what actually brings us happiness are a bit different.

A few thoughts here:

1. For those of you that aren't aware of the terminology, in his first book he equated "playing good offense" with "earning more money" and "playing good defense" with "keeping spending under control." To have a good "team" (high net worth), you need to do both, but as they say in football, "great defenses win championships."

2. When he says "glittering rich", he means very wealthy individuals -- so wealthy that they don't really have to worry about what they spend. They have extremely high incomes and vast sums of wealth. In 2007, you needed to earn $2 million a year and have a net worth of $20 million to be considered glittering rich. (BTW, this is often the group that many people refer to when talking about "the rich", but they are way off the scale compared to the "average" wealthy person.)

3. While I advocate both trying to increase your income (and make extra money in addition to your salary) as well as keeping spending under control, the reason I list spending less than you earn as my best piece of financial advice is because it's more controllable and an option that's available to more people (it's easier for most people to cut spending than it is for them to earn more).

4. Notice his wording: "living well below your means." It's not simply "living below your means" but "living WELL below your means." What saving percentage constitutes living WELL below your means? In an earlier post he said we need to save 20% of our incomes -- which implies you live on 80% of what you make.

5. I think we all know that having stuff doesn't make us happy. It can make like more enjoyable and maybe there's even a temporary "happy" bump, but in the long-term, more possessions/stuff doesn't make most people happier. What does? A couple things that I know of are giving and experiences.

One Example of Living Paycheck-to-Paycheck

2009-12-01T05:29:00-05:00

In my post titled From the Ugh Files, I asked the following questions:

How does living paycheck to paycheck happen? (I've never done it, so I honestly don't know.) Is it an ever-increasing lifestyle as salaries increase? Or maybe it's an income hit that takes away all the slack in an otherwise decent budget? Or maybe something else? Anyone have any insights here?

Now since that post, I've detailed a bit more on people who live from paycheck-to-paycheck, but one reader sent me an inside glimpse of how it happened to her. I thought the story was worth sharing with all of you, so here goes:

I knew some basics of money, but I don't remember as a kid ever really having a talk about such things or having money spelled out.   My parents did make me pay for my own stuff when I was old enough for a job, including my college and wedding.   However I managed it I knew enough to try and not over spend, I also grew up with frugal parents. They did not spoil us with gifts and we needed to do our chores to get an allowance.

When I was in college, I had a little savings and a combination of that, work and scholarships paid my way through College. I went to a state school and lived pretty cheaply. I could have done better on a few fronts but hindsight is 20/20.   I would have picked a different university, done better about applying for more financial aid and tried for internships instead of working my summer job all through college. The go to another school option would have involved moving to another state at 18 for a year so get in state residency, probably a bit ambitious for an 18 year old.

Even though I was mostly broke but not in debt in College, I was too trusting. One of the worst things I did was my choice in relationships. I got involved with people who were not good about their money and let it affect me.   I would get pulled out of my default good habits.   For example, a boyfriend borrowed money from me to buy stuff for his business. I put something on my card for him (He didn't have one) at some online retailer, and for whatever reason they kept letting him buy more stuff from the number on file. Once it got to $800 and no sign of him paying me back, I called my credit card company and told them I lost my card and needed a new number.   This behavior was passive aggressive, I suppose I should have talked to him about it. We broke up and most of college was uneventful.

At the end of college, I ended up getting involved with some really bad news.   Talk about an 8 year old in a 25 year old body. I was seduced by someone paying attention to me, I was geeky and never attracted men. Anyway, call it whatever you will but I was stupid, I moved in with this guy because "I was in love". He was totally bad news and had the typical abuser personality (I read up on this later). Although he had a good job at the time we met, and treated me nicely he got fired soon after. Somehow things ended up being my fault and I was guilted and abused physically, mentally, verbally you name it. This guy was extremely controlling. Not only that but he sucked me dry on credit and debt.   I wasn't able to stand up to him with the person I was at the time.   If he wanted something he bought with my money, exactly what you were talking about a possible issue for the lower 15% with an entitlement mentality.   Once when I said "I don't have any more money" after he sucked up all my savings, he said something along the lines of "If you have credit and can spend it, that is money." This guy had no credit cards of his own as you can understand from a view like that, he also didn't like to pay credit cards even though he used their credit.   I HAD (past tense) perfect credit up until this time and he forced me to buy all sorts of crap.

Eventually my parents were able to help get me away from him. They got him arrested, he had some misdemeanor and they told the police where he was and the nice police people locked him up, just 1 day free from him I packed my stuff and ran off with my parents. After going through everything with him, I was in enormous debt and had a bunch of collectors hounding me.   I don't remember how much debt I had, but it was over $150k if I am in the ballpark.   Luckily I didn't have any college loan debt and was still able to graduate despite missing the last semester of classes.   I didn't know what else to do so I filed for bankruptcy. This was 9 years ago, thankfully it is almost off my credit.

After I got back to normal, I got a job, worked, lived modestly and started saving again. I managed to save up what I thought was a decent nest egg of about 6-7k and had put 4k into a Roth in E-Trade, this was my early to mid 20's.   For me, working a 30k a year job I thought I was doing great.    I got involved with another guy, ended up marrying him and we bought a house we could barely afford using my savings as the down payment and as a result I was living paycheck to paycheck for years.   I felt chained to the house and to my husband towards the end. Although we were not stupid enough to get an ARM, we did leverage ourselves in to a house and all the extra money went to paying the house and living.   Because of this, we could not save any money and any little bump could send us over. I suppose we bought into the "you are married, you should have a house" and the thought that our income would only go up over time.

My husband was also irresponsible but not as obviously as the other winners I had picked.   I'll admit I was stupid, and I'll give the warning if you want to re-post this (anon please) that who you get involved with definitely has a huge financial impact.   The big way my husband was irresponsible was that he decided he hated his job, quit because he thought his boss hated him, was going to fire him anyway and decided to go into business for himself. We talked this over and I said something along the lines of "OK if that is what you feel is best and what you need to do".   I also put a but statement in that that he always forgot about, which is "but we need to be able to afford to pay our bills, you need to figure out how to do the self employment and get the bills paid because I can't do it alone on my income."   The result is that he sat around at home, poked at selling stuff on E-bay a little, went riding with NASA to try and convince someone to give him a region and to support the house I borrowed money.

Yelling at him about the money flow issue didn't work, telling him we needed to sell the house because of cash flow issues didn't work, begging him to get a job, do consulting, do anything didn't work. In general talking to him rationally about this didn't work, there was always an excuse.   I still don't entirely understand what was going on in his head, to me numbers are numbers, if there is less coming in than going out it is a problem.   Perhaps because he didn't feel it till the end the money problem wasn't real. I ended up taking the hit on borrowing to keep the house from being foreclosed but even when I was borrowing and had "money" I felt it, the debt and obligation felt like walking around with 100 lbs on my back.   Some of my favorite excuses were "working a low paying job isn't worth my time", "but I thought you would make a lot of money at a better job after you finished your Masters and we would be OK." and something along the lines of "You said I could do this" in regards to quitting his job, forgetting my but about being able to afford him jobless.   He also said something along the lines of I was a looser because I couldn't get a better job.

Yes, I could have done better getting a job, but as a recent college graduate I didn't know a lot of the things you need to do to separate yourself from the pack, also I was tied to a narrow location due to him and the house. I did better with a wider search, I'm in a different state than the one my former husband and house occupy.   Hopefully I'll do better next time I have a job search, more self confidence and better presentation of why I'm such a hot cookie you would be lucky to have me working for you. I also realized after going through the third guy with these types of traits that I needed to do better at picking a relationship next time, I went to a therapist to help with that issue.

Although it really does not matter at this point, I derive some satisfaction from knowing I was right and he was wrong about the money part. It is cold comfort as I don't see why he couldn't do the math, we were spending more than we earned and this was bad.   Honestly, living with him unemployed and dragging me down financially was the most sustained stress I've had in my life. I was constantly stressed and felt trapped by the house, that my husband was not working, and I couldn't sell the thing by myself (two to sell!). If we had sold the house when I wanted it would have been near the peak and I would have been able to afford to support us both in a small apartment.   My best guess is he felt entitled to what he wanted.   At this point I am truly thankful I'm divorced and without children and probably lucky he didn't listen to me. If he had, and we had sold the house when I first wanted after he quit his job in 2006 I would probably still be married to bad news.

Long story short, I ended up with a lot of debt that I have been repaying from my marriage.   I divorced him after I made it abundantly clear to myself that he loved himself more than us or me, and he wasn't willing to be what I considered to be a responsible adult. After getting divorced I got my finances into high gear, I was determined to save for retirement and get an emergency fund. Two years later I have 10k in an emergency fund (liquid, once I get it o 6 mo worth I plan rolling 6 mo CD's with 1 mo at a time), 25k in my 401k from work and my poor old E-Trade account is about 2.5k after he took his cut from it. I have approximately 5.5k of the debt remaining giving me a net worth of about 33k.   I could pay off the rest of the debt in one fell swoop to avoid paying the interest on the loan, but I think it is more important to have the emergency fund as a cushion. I also track my expenses in a worksheet. I bought Quicken and tried it a few times to try and automate expense tracking and will see how that works instead of the spreadsheet. I also donate some money from every pay check to charity directly through work and I donate to a local women's shelter. I have been matched up with a single woman and will be getting her gifts for Christmas. Honestly, I probably don't donate enough, I am lucky not to be in a terrible situation personally and financially.

In summary, I got into trouble because of relationships and lifestyle inflation. When left to my own devices I am fine so I get back on track OK, meaning in my normal financial habits I don't spend more than I earn.

I think I've learned from this, I live in a 2 BR apartment now that I share to try and keep costs down although I can afford a 1 BR by myself, where I live it would likely be at least $300-600 more a month for a 1BR or more depending on how good of a deal I got.   I spend some of the extra money on myself and have fun, but save some of it also and use a 401k contribution to force a minimum savings every month.   I also save by having $600 come out of my paycheck to the emergency fund every month.   I could always do better cutting expenses, but I don't feel the need to frugal the fun out of my life. This is different than before where I felt guilty whenever I bought something plus feeling angry at my husband when I was living paycheck to paycheck.   Truly, the learning that I was making me unhappy and I was letting him was great.   Once I decided to take control of my life I was and have been much happier.

Did You Shop This Past Weekend?

2009-11-30T16:45:00-05:00

Here's a question for you:

Did you shop this past weekend (including last Friday -- AKA Black Friday)?

The past three days (the three days after Thanksgiving) are some of the wildest in retail stores each year. Believe me, I know. I used to work for a retailer and even though I worked at the home office, we were required to work one day between Thanksgiving and Christmas. As a result, I worked several Black Fridays. It was a zoo!!!!!!!

So here's my answer to the question above:

No, I did not shop in a retail store on the Friday after Thanksgiving. We had guests in, so I was otherwise preoccupied. But even if we didn't have them over, wild horses could not have dragged me to a store on that day. Why? Because crazy people (and lots of them) shop on Black Friday. No thanks.
I did shop online. I worked the day after Thanksgiving and spent a part of the day getting a few things online. No crowds at all. It was GREAT!!!!
I was in a few stores on Saturday (at off times) and traffic was light at best. Hmmmm.

My boss has an annual tradition of going out early (like being there at 4 am) to shop the day after Thanksgiving and he did even more this year (more on that in an upcoming post). Good for him. I wish there were more people like that actually, so they can get their shopping over and leave the stores open for the rest of us sane people to do our shopping later. :-)

How about you? Did you shop in stores or online any of the three days after Thanksgiving?

Best of Money Carnival Now Available

2009-11-30T14:22:00-05:00

Today's Best of Money Carnival is now up. Congrats to all participants and especially the winning post (which I had to name since the host didn't), Are You A Gambler Or Investor? (A Flow Chart) (though I wanted to name Five Steps to Six Figures in Seven Years the winner). ;-)

Enjoy!